Debt and Corporate Performance: Evidence from Unsuccessful Takeovers
Posted: 4 Nov 1996
Date Written: October 29, 1996
In a sample of 573 unsuccessful takeovers we find that, on average, the failed targets significantly increase their debt levels. Failed targets that increase their debt levels more than the median are less likely to be taken over in the future, invest less, and have better operating performance in the five years after the takeover attempt than failed target firms that increase their debt levels less than the median. In addition, those failed targets that increase their leverage the most outperform their benchmarks in the five years following the failed offer. The stock prices of those failed targets that increase their leverage less than the median do very poorly over the following five years if they are not subsequently taken over. The evidence in this paper suggests that debt helps firms remain independent not because it entrenches managers, but because it commits the managers to make the improvements that would have been made by the bidding firm.
JEL Classification: G30
Suggested Citation: Suggested Citation